Russia-Turkey energy relationship at risk

Russian President Vladimir Putin warned Tuesday that Turkey’s downing of a Russian Su-24 warplane will have “significant consequences” for Russia-Turkish ties, raising questions over their hefty energy links.

“We will analyze everything, and today’s tragic event will have significant consequences, including for Russia-Turkish relations,” Putin said.

Russia is currently in talks with Turkey about building a natural gas pipeline, called Turkish Stream, to ship Russian gas underneath the Black Sea to Turkey, and potentially further on to Southeastern Europe.

“[In] this new context it is well possible to expect a further delay, if not even a cancellation, of the Turkish Stream gas pipeline project,” said Simone Tagliapietra, an energy fellow at the Brussels-based Bruegel think tank.

Turkey is also the second-largest gas export market after Germany for Russia’s Gazprom, and Russia is Turkey’s largest gas supplier. Last year, Gazprom Export sold 27.33 billion cubic meters (bcm) of gas to Turkey.

“[If] Russia, as an extreme act of retaliation, uses its natural gas ties with Turkey as a geopolitical weapon, the situation would certainly get difficult for [Turkey],” Tagliapietro said.

However, Gazprom also faces falling demand and slumping oil prices, which are the benchmark for gas prices. Sales fell by 10 percent in the first half of this year. That means Russia may be reluctant to endanger a key trading relationship.

A trip by Foreign Minister Sergei Lavrov on Wednesday to Istanbul was canceled following the military incident. Energy and other trade projects were on the agenda.

Russia stepped up its courtship of Turkey in the past year after Gazprom’s South Stream gas pipeline project — meant to ferry gas across the Black Sea, through Bulgaria and on to the rest of the EU — fell through in December because of EU regulatory concerns.

That same month, Gazprom and Botas, Turkey’s state-owned gas and oil pipeline and trading company, signed a non-binding agreement to build Turkish Stream, with a capacity of 63 bcm.

“After South Stream got canceled, the Russians of course fully counted on Turkish Stream,” said Sijbren de Jong, an analyst with the Hague Centre for Strategic Studies. “And that’s why it would be very complicated to now say, ‘We’ll orient ourselves towards other partners.’ Which ones?”

But the project has been struggling, and Turkey’s elections earlier this month added delays. Recently, political relations between Turkey and Russia have cooled over the latter’s military involvement in Syria.

In October, Alexei Miller, the CEO of Gazprom, downgraded the original capacity by about half.

Botas also took Gazprom to international arbitration, seeking a price discount for Russian gas it said it had been promised. For de Jong, the arbitration case stems from Gazprom’s negotiation position, “which is clearly weaker than Turkey’s.”